Two Stories Every CEO Should Read

The cover story in the March issue of FORTUNE magazine, which we release this morning online, is Saving Penneys by Phil Wahba. It’s about CEO Marvin Ellison’s effort to rescue the iconic but struggling department store. Every student of business should read it, and then go back and read Jennifer Reingold’s story from two years ago about prior CEO Ron Johnson’s effort to do the same.

Together, they capture the eternal tension in business between inspiration and perspiration, vision and data, strategy and execution.

Johnson, who got the job in June 2011 at the urging of activist Bill Ackman, came from Apple aapl, where he helped build the company’s phenomenally successful retail arm. He fashioned himself as a charismatic leader, bent on radical change, determined to make “JCP” a cool brand. He shared the Steve Jobs phobia of surveys and focus groups – customers “don’t know what they want until you show it to them,” as Jobs famously said. He undertook an aggressive remake of the stores that alienated customers, caused sales to plummet by a third, and left 40,000 out of work. In the spring of 2013, Johnson was ousted by the board, which brought back the previous CEO Mike Ullman.

Ellison is a different sort of leader. He grew up as one of seven children that sang as a gospel group in clothes they bought from JC Penney jcp, and he started as a security guard at Target tgt for $4.35 an hour. He is a living embodiment of the adage that “retail is detail,” walking the store floors and repositioning merchandise to elicit more purchases from existing customers. He requires all his executives to wear JC Penney merchandise on store visits, to better identify with their customers. “We can convince ourselves that our core customers are a more affluent demographic,” he says. “But really, they are not.”

The jury is still out on whether Ellison will get the job done. But his journey, and the last decade’s journey at JC Penney, is a fascinating case study worth following.

Meanwhile, Donald Trump trounced his opponents in the Nevada caucuses, moving one more step closer to the Republican presidential nomination.

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J.C. Penney’s plan to catch up in the e-commerce wars

J.C. Penney JCP reported good results for its second fiscal quarter on Friday, besting its main rivals Macy’s M, Kohl’s KSS, Dillard’s DDS, and Sears SHLD in sales growth.

That continued momentum is the result of Penney’s enormous efforts to undo the damage wrought by former CEO Ron Johnson’s failed attempt at turning the department stores into a hip retailer in 2012 and 2013. In the two years since Johnson left, Penney has begun to recover from a 30% revenue drop by bringing back popular house brands like St. John’s Bay, reconfiguring its home goods sections and assortment, and re-integrating its stores and e-commerce teams.

Those efforts helped generate a 4.1% increase in comparable sales for the second fiscal quarter of 2015 (at Macy’s, comparable sales fell 2.1%), and lift gross margins by 1 percentage point to 37% of sales as Penney had to sell fewer items at clearance prices. A lot of that had to do with improvements in its jcp.com business, where growth sped up compared to the first quarter.

But in his first conference with Wall Street analysts as Penney’s CEO, former Home Depot executive Marvin Ellison made it clear there is a lot of work to do on the e-commerce front to get Penney, whose sales are still 25% below pre-Johnson era levels, back to what he called “a world-class retailer.” To catch up, Penney’s investments in tech will amount to 29% of its capital expense budget this year, compared to 22% historically.

“We are admittedly behind the retail industry in our omni-channel strategy,” Ellison said on the call, using the industry term for the integration of stores and digital commerce.

A case in point: Penney will only get around to giving shoppers the option to pick up an order made online in any store next year, months behind Kohl’s and years behind Macy’s. Ellison said it’s not enough to recreate the pre-2011 Penney given the major advances in e-tailing.

Here is what Ellison, who took the reins on Aug. 1 after co-piloting the retailer with former CEO Mike Ullman for nine months, has planned for the retailer on the e-commerce, tech and other fronts.

More assortment online

One of Ellison’s recent hires, former Home Depot executive Michael Amend, has been tasked with working with Penney’s merchants to “aggressively” expand the assortment on jcp.com. While the website does a good job of showcasing what customers can find in stores, “you see very few unique items that are online-only,” Ellison said. That strategy echoes that of Walmart WMT, which is also vastly expanding what it sells online.

Reducing the number of out-of-stocks

Penney’s revenues have been hurt by having out of stock goods, depriving it of sales and disappointing customers. This calls for better inventory management and coordination between e-commerce and in-store operations. If a customer at a store in Maine likes a sweater that is out of stock, jcp.com or a clerk in that store should know that a location in Pennsylvania has it in stock and can send it to the customer. It may sound basic, and many retailers already do this, but it is crucial to lifting Penney’s sales.

Using data to figure out what customers want

Ellison recognized that there are a lot of searches on jcp.com that fail to lead to a sale. With better analytics, Penney is now gathering data on those failed searches and out-of-stock scenarios to get a better handle on what shoppers are looking for and to improve demand forecasting. The retailer will not likely benefit from these efforts until next year, when it has collected enough data.

Analytics more broadly will help Penney with pricing, which it now does largely without detailed data, raising the risks of mis-pricing items—either leaving money on the table for items it could price higher, or overcharging for items.

Improving logistics

Penney is only now starting to reap the benefits of an investment it made years ago in Oracle database systems, something it expects will help its teams better plan when merchandise gets to stores and distribution centers, improve its buying process, and adapt inventory to a given store’s needs. That in turn should lead to fewer markdowns at stores.

A vastly improved loyalty program

With Macy’s now part of a multi-company rewards program, and Kohl’s new program a runaway success, Penney is under the gun to reap the same benefits from a closer understanding of a customers’ interests. Ellison wants to use the data Penney is collecting to personalize ads and communicate more directly with shoppers.

As he points out, Penney is back to having 87 million active customers, the same number as before the Ron Johnson debacle. But with sales still well below where they used to be, it’s clear the retailer could stand to squeeze more out of each shopper.

“The real litmus test is getting more people into the store and get them to buy more frequently,” says ITG Investment Research analyst John Tomlinson.

And that’s ultimately what all of Penney’s initiatives are designed to achieve.

Ron Johnson’s latest act? Online retail with a side of personal service

An online consumer tech shopping site with the name Enjoy sounds like a bad joke. Has anyone ever enjoyed buying—and then installing—technology?

As the proud and oft-frustrated owner of three iPads, two flat-screen TVs, one Dell PC, two Macbook Airs, and one Sonos sound system, I am fairly confident that the answer is a resounding NO. Our devices do work—sorta kinda—but I am probably using about 5% of all of that technology to its full potential, both because I have no clue how to take full advantage of these gadgets and the idea of figuring it out is both daunting and time consuming.

Enter Enjoy, the three-month old startup founded by Ron Johnson, famous for his long tenure as the head of Apple AAPL Retail stores and infamous for his short-lived stint at the helm of JC Penney JCP. (Fortune covered this saga extensively; see How to Fail in Business While Really, Really Trying). Funded by the likes of Kleiner Perkins and Andreessen Horowitz, Enjoy takes the high-touch sales model of the Genius Bar and brings it to your home. When you buy a piece of consumer technology—anything from a phone to a TV to a PC—you pay full retail, but what you get for free along with the product is a real, living, breathing, human being to help you set it up. (Alternatively, you can pay $99 for one hour of tech service on a product of your choice).

That’s what I did, and, probably because Enjoy is in startup mode, I promptly had not one, but two actual people at my door at 7 p.m. one night: Giovanni and Cab, a trainee who also managed to hypnotize our dog (no extra charge).

Although it’s easy to envision Enjoy as Uber-meets-Geek Squad, Enjoy has a few important distinctions. First, the technicians are not freelancers but employees, with benefits, and they don’t work on commission, following Johnson’s experience with Apple Geniuses. “Our product is a person,” says Johnson. “Uber’s product is a ride. And if your product is a person, you want to own the experience.”

Those products are carefully vetted before they are hired; although Enjoy is only available in two markets right now—New York and San Francisco—Johnson says 10,000 people have applied for just 65 slots. (Johnson was famous for his deep involvement in the hiring process for Apple Retail employees). I opted for the $99 an hour service, and requested help with the PC I had purchased for my kids, which they claimed “didn’t work” (the actual goal: get them and their sticky fingers off my MacBook Air). I thought Giovanni could show us a few things and then connect a printer.

It turned out that my kids were right. The PC did not, in fact, work—at all—because the kids had accidentally downloaded all kinds of malware. Giovanni figured this out right away, but it turned out that getting rid of it would require more than the one hour of service I’d paid for. No matter; he took the time needed to fix it (at least 90 minutes), taught us how to create new user accounts, and, a day later, followed up with an email to ask how things were going. He also included a link to the connector I needed to buy in order to get the printer working.

In short, Giovanni was kind, helpful, and open to all kinds of dumb questions—a tech geek who actually could communicate. He was kind of like the Genius Bar—if you had it to yourself and if the appointment started on time. Which is exactly the point. When I told my aunt about the experience, she said, “I need that! Are they in Buffalo?” (No.)

The larger question, of course, is whether Enjoy will get the traction it needs to make money. Johnson is—and I say this with true experience in the matter (see Retail’s New Radical)—a born salesman for whom everything is always going better than imagined. He won’t disclose how much he has spent or how many customers the company has, saying he’s concentrating on getting the experience right first. “We’re not in a hurry,” he says. “All we care about is delivering quality.”

Enjoy doesn’t seem to be burning up NYC—I had no problem scoring an appointment each time I tried—but that may be by design. The company has, however, obtained a button on AT&T’s T checkout page in which, after buying your phone or tablet, you can opt for an Enjoy visit. Is that enough to make up for the fact that currently no Apple products can be purchased on the site? Johnson hints that that situation won’t last forever. “Stay tuned,” he says. We will.

It’s been two years since J.C. Penney fired former CEO Ron Johnson after his failed attempt to revive its brand resulted in a near-death experience for the retailer.

Now, Johnson is back as the founder and CEO of e-commerce website Enjoy. The new company promises to let customers shop online for a variety of electronic products, and then have them hand-delivered at no extra cost by an “Enjoy Expert” who will spend up to an hour offering personalized instruction on how to use them. The tech support is free with every order from the website, or people can also pay $99 for a visit from an expert to offer instructional help with a technological product they already own.

Enjoy, which launches Wednesday in San Francisco and New York City, sells products ranging from GoPro action cameras to home entertainment products as well as tablets, drones, and motorized skateboards. The company is also partnering with brands such as AT&T T, Hewlett-Packard HPQ and Sonos.

“Enjoy was founded on the simple premise that people need help and we believe that a human connection is the best way to help them,” Johnson said in a statement. “With Enjoy, we’re delivering the first personal commerce platform, offering an entirely new way for customers to buy products and for our employees, an entirely new way to work.”

Johnson told CNBC on Wednesday morning that Enjoy’s employment structure gives the so-called Enjoy Experts equity in the company, on top of salaried positions, and allows them to set their own hours. The company has already raised $30 million in funding from investors such as Andreessen Horowitz, Kleiner Perkins Caufield & Byers, and Oak Investment Partners.

In 2012, Johnson’s arrival at J.C. Penney JCP represented a high-profile move considering his successful earlier stints as retail chief at Apple AAPL — where he created the Genius Bar — and as the executive credited with revamping Target’s TGT image. But, after less than two years with Johnson at the helm, J.C. Penney’s share price plummeted as the company lost billions of dollars in sales and laid off roughly 20,000 people.

Exclusive: Whistleblower files claim against JC Penney

The bad news continues for JC Penney. At the end of February, its stock tanked following the announcement of disappointing profit numbers for 2014. Its chief marketing officer, Debra Berman, left abruptly in mid-March, followed, on March 20, by general counsel Janet Dhillon. Now Fortune has learned that a former employee, Robert Blatchford, has filed a claim against the company under Florida’s Private Whistleblower Act. The case—which could lead to deposition testimony by former CEO Ron Johnson—brings back to life a dark period in JC Penney’s history. However it ends up being resolved, it’s an unwelcome reminder of the confusion that still exists inside the $12 billion in sales mid-market retailer.

Blatchford, who worked in the custom decorating department in the Penney’s St. Petersburg store between 2007 and 2009 and then again on a part time basis from August 2012 to July 2013, says he was retaliated against by his manager—and later, by the company—after, during his second stint at Penney’s, he complained that his store was charging customers full price for items on sale and collecting sales tax on nontaxable items.

Blatchford alerted Penney’s corporate hierarchy, including sending emails to both then-CEO Johnson and Dan Walker, then the head of human resources. Both senior executives promised to look into the situation, according to emails Blatchford shared with Fortune.

The emails do confirm that the company at least examined the allegations. Notes one communication from the auditor, dated March 25, 2013: “We have discussed our investigative results with management and they have addressed or will address them accordingly.” (This was a chaotic time at JC Penney, as Fortune reported last year. Johnson resigned under pressure in April, shortly after the company reported a $4 billion drop in sales in the year he had been CEO.)

Then things got even more complicated. Blatchford was dissatisfied with the lack of a publicly announced company plan to rectify what he saw as a fleecing of customers. He decided to go public himself and took his claims to the Today Show in July 2013.

JC Penney responded by firing Blatchford and suing him for theft of trade secrets—based on his claim that he had company information that would prove his own case. Later, in September of 2014, Penney’s reversed course. It dropped the suit, perhaps because it realized that little good could come from going after a part-time employee with a penchant for publicity.

That wasn’t enough for Blatchford, who says his reputation has been sullied. He says he hasn’t worked since he was fired from Penney’s. On Feb. 2, he filed an arbitration claim against the company charging retaliation for having spoken out against the practices he witnessed—both inside his office and from the top of the organization. “I was, (am), clearly ‘war-weary’,” Blatchford wrote to me, “but I have to be honest here, I can’t just let this end without proper vindication of my name, I am not a ‘rat.’” JC Penney declined to comment, citing its policy on not discussing pending litigation. The company has not yet filed a response to the suit.

Does Blatchford have a case? It’s hard to say. But he does have in his possession numerous emails from former executives at the company, such as Johnson and Walker, and says he is planning to subpoena them to testify. It’s perhaps an accident that Blatchford’s complaint was filed on Groundhog Day, but that’s exactly how it will feel to everyone at JC Penney should its former executives end up back in the news, talking about the trials and tribulations of the retailer during the disastrous Johnson regime, once again.

J.C. Penney: CEOs may change, but the losses endure

When a company can’t keep or won’t keep its CEO, it signals either lack of strength in the C-suite, a floundering board, or both. Which is it with J.C. Penney? It looks like both.

After Ron Johnson departed in April 2013, the company rehired Myron Ullman, who had resigned in November 2011… to be replaced by Johnson. After over a year in the post, Ullman has yet to turn things around at the struggling retailer. On Wednesday, it announced that same-store sales were flat and net sales fell compared to the same quarter last year. While not as bad as last year, losses continue to mar the company’s fortunes. The operating loss for the third quarter was $54 million, according to Wednesday’s earnings call.

Instead of hiring an existing CEO from another retailer, J.C. Penney has made a more realistic CEO choice, Marvin Ellison, former executive vice president of U.S. Stores at Home Depot. Although this appointment does not seem as expensive a hire as Ron Johnson, the company still had to throw a lot of money at Ellison to buy him out from Home Depot. And that’s not the only expense. He will be subject to a nine-month “apprenticeship” under Myron Ullman, who will remain as CEO until August 2015 and then as executive chairman after that. During this period, the company will be effectively paying for two CEOs.

Corporate boards are responsible for succession planning, and J.C. Penney’s board is seriously in trouble in this area. There were no internal CEO candidates, apparently. The only other named executive officers in the last proxy statement were Kenneth Hannah (appointed as CFO in 2012), Janet Dhillon (general counsel from 2009), Brynn Evanson (Executive Vice President HR, appointed in 2013), and Scott Laverty (appointed Chief Information Officer in 2013). In addition to Johnson’s departure, Penney also announced the departures of Michael Kramer, former Chief Operating Officer, and Daniel Walker, former Chief Talent Officer. There doesn’t appear to be a COO at the company at all, typically the next in line for CEO at a retail company. Home Depot, on the other hand, had so many senior executives to choose from it didn’t choose Ellison, but Craig Menear, the company’s former U.S. retail president.

The current Penney board oversaw most, if not all, of this mess. Colleen Barrett has been a director since 2004, Thomas Engibous since 1999 and chairman since 2012, Kent Foster since 1998, Leonard Roberts since 2002, Javier Teruel since 2008, Gerald Turner since 1995, and Mary Beth West since 2005. Only Stephen Sadove and Ronald Tysoe joined the board in 2013, and B. Craig Owens was appointed in October 2014.

Penney shareholders seem to have given up on the company. Almost half of the company’s shares did not vote on any issue at all at the annual meeting on May 16 this year, including the election of directors. This board clearly has a lot of work to do to win them over.

While the appointment of Ellison, who was responsible for much of the turnaround at Home Depot over the last decade, appears to be a smart one, the board still failed, this time by spending too much on Ellison’s starting pay package.

Like Target, which appointed a senior executive from Pepsico in July, J.C. Penney’s CEO choice shows that the real market for chief executives is not other CEOs but the next tier down within senior management. The compensation committees and consultants of this world are using the wrong comparison group to set CEO pay. They should be using the pay of CFOs, COOs, and EVPs, not other CEOs, who already have the top job and aren’t interested in moving except if they are running a small company and want to run a big one. That is not the case at J.C. Penney, Home Depot, Pepsico, or Target, all very large companies that are unlikely to hire CEOs away from each other.

If board compensation committees used these second tier executives to determine CEO pay, the new median salary would be much lower than it is today. All the J.C. Penney board had to do was pay Marvin Ellison slightly more than he was paid at Home Depot and ambition would have done the rest.

Instead, the board awarded Ellison a package with far more upside than Ullman and bought out all of the unvested equity and cash he left behind at Home Depot. If I were a Penney shareholder (and I’m not), I wouldn’t simply abstain from voting for the sitting board members at the next annual meeting, I’d vote against them.

How next J.C. Penney CEO’s pay package stacks up to Johnson, Ullman

J.C. Penney’s JCP incoming president and soon-to-be CEO Marvin Ellison stands to get a less lavish, but steadier annual compensation package than his two predecessors got.

Ellison, who last year had a total compensation package worth $4.37 million as the head of Home Depot’sHD U.S. stores, will get a lower base salary than either of his two precedessors, getting $1.3 million a year. Mike Ullman, who was CEO from 2004 to 2011 before returning in April 2013 to save the company after Apple superstar Ron Johnson’s disastrous tenure, is being paid $1.5 million a year, as was Johnson. Ellison will start as president on Nov. 1, apprenticing under Ullman for 9 months before becoming CEO in August 2015.

But in other ways he’s getting goodies that make up for that. To compensate him for the stock awards he is losing by leaving Home Depot, Ellison is getting a $4.1 million cash signing bonus. (Johnson got no such signing reward.) On top of that, he stands to get performance bonus of $3.9 million in 2015 (0r 300% of his base salary, vs the 200% Ullman is eligible for.) What’s more, he is also getting a Penney stock award worth $15 million today and distributed over three years. That comes to a total of about $11.6 million a year, at today’s stock prices, and possibly much more if he manages to kickstart Penney’s heart. (Ullman could make as much as $10 million in compensation this year.)

When Penney hired Johnson to much fanfare, with his promise to revitalize a tired old department store by turning its stores into collections of dozens of hip brands, it spared no expense so eager was it to get its “transformation” under way: it gave Johnson a total package in 2011 of $53.3 million, the bulk of it stock options to compensate him for restricted Apple AAPL stock he was leaving on the table. Penney also gave Ullman total compensation of $34.51 million that year, apparently to get him to go away.

(Johnson invested $50 million of his own money in J.C. Penney stock warrants for 7.26 million shares that are worthless now, with the stock at $7 and nowhere near the $29.92 it needs to be to be in the money. His stock awards, which were the bulk of his compensation, especially since Penney’s 25% sales decline on his watch meant no bonuses were also worthless.)

So while Ellison mighty have been passed over for the top job at Home Depot last month, and is getting compensated more sanely than Ullman or Johnson were in peak years, he’s getting a lot more cash up front and a lot of upside if Penney’s stock blooms. No bad for someone in his first CEO job.

J.C. Penney’s tough slog ahead

J.C. Penney’s sales may be recovering gradually after the department store’s disastrous experiment with trendier offerings and store displays in 2012. But they are rebounding too slowly for Wall Street’s taste.

J.C. Penney raised investor concerns about its turnaround at its analyst day in New York on Wednesday by lowering its third-quarter comparable sales forecast after a disappointing September. It’s shares JCP fell 11%.

The revised forecast served as a reminder of how fragile Penney’s recovery is from its failed reinvention two years ago. That effort was overseen by ex-CEO Ron Johnson, a former Apple retail whiz who jettisoned discounts and brought in trendier and pricier offerings like Michael Graves home goods.

At the same time, he dumped billion dollar in-house brands like St. John’s Bay, alienating long time shoppers without winning new ones. That failed experiment cost the company $4 billion in sales, or a quarter of its business, in 2012 alone.

Penney on Wednesday announced a series of initiatives designed to lift sales to $14.5 billion annually by 2017. That’s an improvement over the $12.4 billion analysts expect for the fiscal year ending in February. But that is far below the $17.3 billion in annual sales before Johnson’s fiasco. (The all time high was $19.9 billion in 2006.)

In August, the retailer had said it expected comparable sales to rise by a mid-single digit percentage this quarter. But it now expects growth to be at a low single digit percentage. That is anemic when one considers sales fell 30% over two years.

Penney expects comparable sales growth through 2017 at a mid-single digit percentage: back of the envelope math suggests that at that rate, it will take Penney 6 to 8 years or so to recover sales lost during Johnson’s 14 month tenure, which ended in April 2013.

The next chapter of Penney’s recovery hinges on the “center core,” or the most highly trafficked part of store. The plan entails revamping departments that sell shoes and handbags, which are big attractions for shoppers. The retailer is expanding the space allocated to women’s shoes by 30% and will separate the men’s footwear into its own area in 2015.

The company is also looking to capitalize on the success of the Sephora cosmetics shops inside its stores. More Sephora shops are planned as is enlarging existing ones. Sephora boutiques generate about $600 per square foot per year, more than three times the Penney store average.

Penney will also open Disney DIS boutiques at another 116 locations next year, bringing the total number of Penney stores housing a Disney shop to 681. It is also going to roll out Hallmark gift and card boutiques.

As part of its planned growth, Penney expects to increase online sales by $800 million through an improved digital strategy, including offering in-store pickup of orders placed online and new mobile apps.

Mike Ullman, Penney’s CEO, told Fortune that Penney did not need to close stores, despite the lower sales compared to three years ago. The vast majority contribute positively to results, he insisted. And while Penney may have picked up a bit of business from struggling rival Sears, Ullman warned Wall Street that the overall climate is still tough for Penney’s shoppers because their income is not growing quickly enough.

“J.C. Penney is in a far stronger position than it was when we began our turnaround 18 months ago,” said Ullman, who came back as CEO in April 2013. But there is still a lot of work for Penney he hastened to add.

How not to channel Steve Jobs

On June 16, New York State Supreme Court Justice Jeffrey Oing issued a 63-page decision in which he found that retailer J.C. Penney JCP had committed tortious interference in its attempt to develop a Martha Stewart store inside JC Penney stores. The deal, announced in 2011 as Ron Johnson took Penney’s helm, violated the terms of a preexisting deal that Martha Stewart Living Omnimedia MSO had with Macy’s M, the judge ruled. Damages will be determined by a special master or referee.

The decision surprised no one. Oing had previously issued a preliminary injunction barring Penney from building the stores and selling most of the products. The ill-fated deal was just one of the many choices that contributed to Johnson’s ultimate failure.

The decision also sheds light on how closely Johnson’s own approach to management hewed to the “reality distortion field” made famous by his prior boss and mentor, Steve Jobs—and, more important—how infrequently such an approach can succeed outside of Apple.

When Johnson took the helm at J.C. Penney, he brought with him a strong belief that his Apple experience—he built the company’s stores, now the most profitable retail group in the country—would be a huge plus. So did Penney’s board of directors; indeed, it was the main reason he was selected. Johnson held a coming out party eerily reminiscent of Jobs’ MacWorld events; he added a clean, white aesthetic to the company’s branding and logo; he hired several Apple veterans; and he talked constantly about his closeness to Jobs and the Apple way of doing things.

Jobs was rightfully lionized as a creative genius, but he was also a fiercely competitive leader who simply could not bear to lose. That ferocity—plus a force of will that could convince just about anyone of anything—was referred to by people around him as his “reality distortion” field. And it is this trait that we see Johnson emulating in his attempt to convince the world that Penney was not, in fact, infringing upon Macy’s earlier agreement with Martha Stewart’s company.

The emails presented as evidence in the case show a leader who had already convinced himself that he had won—regardless of the fact that even his own counsel worried about the deal’s legality. As Johnson wrote in an email to Daniel Walker, an Apple retail veteran he had hired at Penney: “I’m feeling awesome about grand strategy. I need to pull off Martha. I need to propose a deal so she can go to Terry [Lundgren] at Macy’s and break their agreement. That is the only issue in way of success at this point.” Johnson suggested, with some glee, that Lundgren would probably “have a headache,” when he heard about the JCP deal, one that would soon develop into a “full on migraine.”

The judge was clearly astonished by Johnson’s reaction after Martha Stewart announced to Lundgren that she had signed on with Penney. “Incredibly,” the judge wrote, “ignoring the seriousness of what had just transpired, Mr. Johnson wrote to [board member] William Ackman: ‘Media good as well. We put Terry in a corner. Normally when that happens and you get someone on the defensive they make bad decisions. This is good.’ And to board member Steven Roth, he wrote ‘…the more this is seen as brilliant for JCP and Martha the more he won’t want to interfere…’”

In fact, the opposite became true as a result of the company’s cavalier attitude, Oing observed. “Unbeknownst to Mr. Lundgren and Macy’s, Mr. Johnson’s attitude towards them with respect to JCP’s budding relationship with MSLO was take it or leave it. Mr. Johnson aptly described the scene as making JCP’s ‘offensive so strong’ that Macy’s would ‘simply pick up their toys and go home.’ JCP and Mr. Johnson could not have been more wrong.”

It is axiomatic that leaders must believe that they have made the right decisions. But as this case shows, believing that they are right does not make it so—no matter what Steve Jobs would have said.

How to Fail in Business While Really, Really Trying

When you find a savior, you don’t quibble over details. So it was that J.C. Penney jcp, the long-stagnating mid-tier department store chain, announced in June 2011 that it was hiring Ron Johnson, the man in charge of Apple’s aapl wildly profitable retail stores and a Steve Jobs acolyte whose golden halo also included past triumphs as an executive at Target tgt. The news sparked euphoria, but conspicuously absent from the media coverage was any mention of how Johnson planned to save this faltering retailer in a fading industry. That’s because there were no plans. His mandate could be reduced to a single word: change. What that entailed could be figured out later.

That fall Johnson began unveiling his planned strategy to Penney’s board, culminating in a big presentation on Dec. 7. By then CEO for just a month, Johnson laid out his vision of a more upscale, more youth-oriented Penney, weaned of its addiction to price promotions.

Johnson demonstrated that he’d learned a thing or two about stagecraft from his legendary former boss at Apple. He had commandeered a large basement studio at Penney’s Plano, Texas, headquarters and had workers construct two rooms. (Johnson wanted to go further and install floating stages in the company cafeteria, but the fire marshal nixed the plan.) After he had made his presentation, the new CEO brought the directors downstairs to deliver the coup de grâce in the form of a sound and light show. In the first room was the taped commotion of shouting voices and visual noise: a profusion of signage, coupons, offers, and clutter. This was the off-putting cacophony of J.C. Penney at that moment. Johnson then ushered the directors into the next room, which was white, tastefully austere, and had a celestial serenity: the new JCP.

Finally Johnson led the board members into the cafeteria, where 5,000 employees, who had been waiting on their feet for hours, greeted the group with a raucous ovation. Then it was party time. Officially the fete was intended to bid farewell to Johnson’s predecessor, Myron “Mike” Ullman III, but it felt more like an ecstatic celebration of the company’s rebirth. With nary a whisper of opposition, the 109-year-old retailer had decided to abandon not only its strategy of many decades but arguably its fundamental way of doing business.

Just 16 months later Johnson was out. Penney was hemorrhaging cash; it lost $1 billion during his one full year as CEO. Its shares were hurtling downward. The press had turned against him. One of the two investors who installed him had fled. As fast as they had once anointed Johnson a messiah, Penney’s directors turned their backs on him.

Since his departure the company has behaved as if Johnson’s entire tenure was a coup rather than a strategy blessed by the board. The retailer has renounced his philosophy, restored Johnson’s predecessor, Ullman, as CEO, and reverted to its old ways. If we’re heading for oblivion, the board seems to be saying, let’s at least try to get there slowly. Some observers think bankruptcy is a possibility, despite improved results of late (at least compared with the previous bloodletting).

This era has seen some truly epic corporate conflagrations. There was the precipitous collapse of Lehman Brothers, which came to symbolize the greed and corruption of Wall Street, and the multidecade decline and, finally, bankruptcy of General Motors gm, which seemed to embody the slow death of American manufacturing. But for its stomach-churning mix of earnest ambition, arrogance, hope, and delusion — along with a series of comic and tragic miscues — it’s hard to top J.C. Penney.

“I came in because they wanted to transform,” the former CEO told me before his fall. “It wasn’t just to compete or improve.” (Johnson was interviewed for this article but declined to be quoted beyond saying, “I do not want to interfere with Penney’s attempts to succeed.”) He and his team did indeed transform Penney — from a sleepy behemoth known for serving the needs of Middle America into something quite different: an ambitious wannabe startup that fancied itself cool, with a radical pricing and merchandising model that had never been pulled off before. The outcome was doubly disastrous: Penney alienated its traditional customers without attracting new ones.

Everyone understands that the Johnson revolution ended in catastrophe. But the full story has never been told. The reality, it turns out, is even worse than many people imagine — and in a few respects, very different. What follows is the story of what actually happened at J.C. Penney, based on months of interviews with 32 current and former executives and vendors and more than 20 investors, analysts, and competitors.

It’s a saga with a swirl of overlapping forces. It stars a charismatic leader bent on radical change and features a failed attempt to Apple-ize Penney, a mission that ended up being every bit as crazy as it sounds. There’s a board of directors who sometimes seemed more concerned with what they’d be served for dessert than with the fate of the company. Then there’s the mistake that cost the company $500 million — and the fact that Penney actually began retreating from its controversial pricing strategy even before Johnson left, raising the question of whether the company can even truly be said to have tried his approach. Throw in a hedge fund titan who always knew better — except when he didn’t. The result: Billions in revenue were vaporized, and more than 20,000 people — many of whom embraced the new Penney — lost their jobs, seeming to hasten the decline of American brick-and-mortar retailing. This is a tale with very few heroes.

Into the cube

They called it a “cleanse.” On Feb. 6, 2012, a clear, acrylic 10-by-10-foot cube was installed in the area between the two cafeterias in Penney’s headquarters. It was a three-dimensional version of the retailer’s new square logo. Johnson told staffers that he didn’t want to see the old logo anywhere in the building. He thought it would be a useful ritual to have employees discard symbols of the stodgy old Penney. In theory, the cube was a giant time capsule, and the old Penney would be buried (exactly where, nobody said). In reality, it was a stylized, transparent dumpster.

For the next week people lined up to shed the evidence of Penney’s century-old history. Into the cube went T-shirts, mugs, stationery, pens, and tote bags. A few people even dumped the Chairman’s Award, the highest honor in the company, a glass plaque bestowed by former chairman and CEO Ullman on his most valued employees. As staffers pitched their corporate junk, they were invited to select a few replacement items with the new logo in exchange. By the time the purge was complete, 9,000 pounds of detritus had filled the cube.

Illustration by James Victore for Fortune

The transformation had started with a single phone call a bit more than a year before. At 4 p.m. on Oct. 7, 2010, the phone rang in the office of then-CEO Ullman. The screen flashed “Vornado,” the name of the $2.8 billion (revenues) REIT run by investor Steven Roth. Ullman, a veteran of takeover attempts at Macy’s m, had noticed that Penney’s stock had jumped 10% in the 10 minutes before the call, to $32. He had a pretty good idea of what was going on. “Do you come in peace?” he asked Roth, with whom he had worked on a past deal. Responded Roth: “I’m your new best friend.” And there was a second best friend: Roth had teamed with Bill Ackman, the head of hedge fund Pershing Square Capital, to buy more than 26% of the company’s stock. They believed Penney could easily be a $60 stock — if, of course, some changes were made. Could they meet to talk?

Ullman had run Penney since 2004. He had had a fantastic start, driving the stock to an all-time high of $86 in 2007 on innovative ideas such as bringing cosmetics seller Sephora inside Penney in a “store within a store” and opening some outlets outside traditional, and declining, malls. But when the Great Recession hit, Penney’s core customer — the middle-class mom — suffered more than most. Even when competitors began to pull out of the decline, Penney lagged. One reason: Ullman’s massive deal with Ralph Lauren rl to launch American Living in 2008, a Polo-lite brand sold only at Penney. It failed, in part because Penney was not allowed to use Ralph Lauren’s name or the Polo logo.

Penney was clearly in need of rejuvenation. Revenues had dropped from $19.9 billion in 2006 to $17.2 billion in 2011, taking the stock price along with it. Rather than resist Ackman, a brash, aggressively charming billionaire who likes to make huge bets on big companies and doesn’t hesitate to wage proxy battles against those that rebuff him, Penney invited Ackman and Roth to join the board. “I said, ‘These are two of the smartest people in their industries in America,'” Ullman recalls. “Why wouldn’t we want them in the boardroom?”

In February 2011, Ackman and Roth attended their first board meeting. At dinner afterward, Ackman gave an emotional speech, hailing the company’s potential. Almost instantly, fate intervened. As Ullman’s driver pulled out of the parking lot after the meal, his car was sideswiped. Ullman, then 64, was knocked unconscious. He had multiple fractures where his skull attaches to his spine and spent 12 weeks in a neck brace. Even before that he had battled health issues. For years Ullman had suffered from nerve damage that makes it hard for him to walk (he moves around the offices by Segway). He had endured two major surgeries during his Penney’s tenure.

The accident intensified the board’s concern over Ullman’s health — as well as the undercurrent of dissatisfaction that the new directors felt with his leadership. As director Geraldine Laybourne told me in 2012, “You know you’ve done something wrong when you wake up and someone has bought 26.8% of your stock.”

There were no obvious successors at Penney. Ullman says he thought instantly of Ron Johnson, the Minneapolis native who had helped bring great design to Target before he was recruited by Apple to create its retail stores. Under Johnson they became the most profitable stores in the country, making him a star at what was then the hottest company on the planet. Ullman had called Johnson about a director position a few years back, but Johnson had rebuffed him. Now, however, with Steve Jobs ailing, a recruiter told Ullman that Johnson might be more amenable.

Beginning in March 2011, Johnson met with Ackman and Roth and separately with Ullman. Soon the conversation moved from a role as a director to the possibility of becoming the next CEO. Johnson, who started his career at Mervyn’s and had always loved the retail business, had been pondering the lack of innovation in department stores. He had a vision of a new type of store — a destination rather than simply a repository for product. Well-liked and relentlessly positive, Johnson, then 53, seemed to offer the kind of can-do Silicon Valley spirit that hadn’t been seen in the retail world since, well, Apple. “I just believed in the guy,” Ackman told me at the time. “I had a man crush on him.”

With Ackman as head cheerleader, Penney’s board offered Johnson the CEO position. When the announcement was made, on June 14, 2011, the retail world was astounded — and thrilled. Although Johnson wouldn’t start as CEO until Nov. 1 — he said the cancer-stricken Steve Jobs had asked him to stay longer — Penney’s stock rose 17% on the news. It was as if a triple-A team had just signed Babe Ruth.

When Johnson eventually unveiled his strategy, it centered on a few points. The biggest, perhaps, concerned Penney’s incessant price-slashing promotions — 590 in 2011 alone. The new JCP would have virtually none. There would be three prices for an item: the original price, which was far below the typical marked-up price; a month-long value price for certain items; and a twice-monthly “best” price for things that needed to move. No more clearance racks, no more mess, just an honest — or as a later slogan put it, “fair and square” — relationship between the customer and the store. In a retail world full of illusory market-share gains based on which retailer offered the lowest clearance prices, it felt like a welcome way to stop the madness.

The second component of his strategy was equally radical. Johnson wanted to remove the “department” from the department store, recasting each store as a collection of 100 separate boutiques, with a kind of town square in the center. The product mix would change too. The new JCP would feature a much higher percentage of branded merchandise — modern, higher-end, youth-oriented — compared with house brands. This was a very big move for Penney, which got 50% of its sales from its own brands and tended to display most of its products by classification (such as bath mats) rather than by collection (such as Martha Stewart).

The new strategy made sense if Penney could attract many top brands, which would lure consumers without the catnip of frequent sales. Clearly, the approach worked for iPhones. Would it work for mattress pads and pantyhose?

Johnson wasn’t going to wait around for an answer. When a director asked when he planned to test the notion, Johnson scoffed. Never mind that other retailers had tried such pricing only to see customers vanish. He had made his decision. After all, his hero, Jobs, disdained tests and instead relied on his gut. At the same time, Johnson didn’t seem particularly interested in how Penney operated, according to Ullman. The outgoing CEO noted in a regular update to the board that the new CEO had not asked a single question about how the business was currently running.

Meanwhile, there were hints that the board was not as focused as it could be. Ackman had consistently complained about the chocolate-chip cookies served at Penney’s board meetings. Rather than soft, gooey orbs, Ackman grumbled, these were rock hard. To assuage him, say three people involved, Penney began ordering fresh-baked cookies delivered from local bakery Tiff’s Treats. Other Penney directors also expressed concern about the caliber of cuisine served at their meetings — so much so that on at least one occasion a senior executive personally sampled the food before it was served. (Ackman declined to comment on the company’s baked goods; Penney denies that an executive served as a food taster.)

The revolution begins

Johnson showed up in Plano on Nov. 1, 2011, ready to lead a transformation at the speed of light. By Jan. 25, 2012 — less than three months later — the new JCP would unveil its new look. A week later the new pricing strategy would be revealed. By the fall of 2012, hundreds of stores would be revamped. And by the end of 2015, if all went according to plan, the transformation would be complete. The timeline was beyond aggressive, but Johnson thought speed would be a great motivator and unifying force.

Johnson himself moved with alacrity. In his second week on the job, he met in San Francisco with Chip Bergh, the new CEO of Levi Strauss. Penney already sold the company’s jeans, but Johnson wanted Levi’s to open boutiques within Penney locations. He asked Bergh where his most innovative outlet was located, and Bergh said Tustin, in Orange County, Calif. “I’ve got a plane,” Johnson said, enthused. “Let’s go right now!” A few hours later Bergh led Penney’s CEO through the Tustin store. Johnson loved the layout, which included a “denim bar,” mobile checkout, and dedicated “fit specialists.” By the end of the day Johnson and Bergh had agreed to open 700 similar Levi’s boutiques inside Penneys in time for the back-to-school season in 2012 — less than a year later. Most of the cost would be borne by Penney.

Money seemed to be no object. It cost Penney some $120 million to build the Levi’s boutiques, according to one person involved. Johnson was also trumpeting a major new investment in Martha Stewart Living Omnimedia and an agreement to open Martha Stewart stores within Penney.

Meanwhile, Johnson was recruiting a team of high-priced all-stars from the outside. He’d hired Michael Francis, the head of marketing at Target, who was credited with bringing the low-end retailer its signature hip cachet. Francis became Penney’s president and head of both merchandising and marketing. Johnson plucked Apple alum Mike Kramer from apparel-maker Kellwood as COO, and Dan Walker, also an Apple veteran, as chief talent officer. Francis, Kramer, and Walker received a total of $24 million in cash signing bonuses, along with millions of stock options.

It was now Johnson’s show. The board had been stunned by the breadth of his planned transformation. But nobody insisted he slow down or test his theory that customers were sick of price confusion. He had a new team, an adoring board of directors, and a mission to reinvent his company.

Now it was time for his public debut at the official JCP launch party, which took place at New York City’s Pier 57 on Jan. 25 and 26, 2012. The cavernous shipping pier was bathed in white, with the new JCP logo omnipresent inside giant neon cubes. The lighting was perfect, the music appropriately ambient, the food top quality. A bevy of retail cognoscenti, including Martha Stewart, lent credibility. (She feted Johnson onstage, despite the fact that Macy’s had just sued her company, claiming that the new deal with Penney violated Stewart’s contract with Macy’s.) Calvin Klein, Mickey Drexler, Cindy Crawford, and Mary-Kate and Ashley Olsen were all in attendance.

Johnson presided with a beatific smile. Clad in a V-neck sweater over a button-down shirt, he waxed eloquent on the lessons he’d learned from Steve Jobs. Seemingly in perfect sync, Johnson and Francis — the two looked almost like brothers — rolled stylish, funny clips that featured Ellen DeGeneres, the company’s new spokesperson, and promised a world of fresh, compelling Americana. Fusty old J.C. Penney’s was no more. The company had rebranded itself with a sleek modern name — JCP — to match its new aesthetic. Ackman and other directors sat in the front section, beaming.

Many in the audience admired Johnson’s passion and nerve, even as they doubted that his plan could succeed. Johnson himself told me that day that J. Crew CEO Mickey Drexler had cautioned him, “Be very careful. You don’t have to be that bold. There’s only one Steve.” (Comments Drexler today: “I’m not sure that he heard me.”)

There was a fair amount of eye rolling in the audience. As Johnson talked about the “six Ps” driving the plan — product, place, presentation, price, promotion, and personality — Adrianne Shapira, then a Goldman Sachs analyst, said, “One ‘p’ that seems to be missing is people.” Kramer, the COO, added to the swagger with his refusal to provide sales projections because “we don’t want to cap what we think it could be.” Penney’s stock vaulted from $34 to $41 the next day.

Back in Plano, the employees were excited too. Many acknowledged that Penney needed an infusion of energy. On Feb. 1 an ebullient Johnson hosted a $3 million extravaganza to salute the company’s workers. Stages were constructed onsite, with four areas meant to conjure a particular season. In “winter,” set up in the cafeteria, there was a snowmaking machine. “Summer” boasted grass for a picnic, and “spring” had a wall of water. There were margarita bars, live bands, and caramel apples mounted on long poles. Hung on the walls were photographs of employees that had been taken at a welcome picnic on Johnson’s first day.

Still, the moment was fraught. The company had announced $900 million in planned cost cuts, and everybody knew that meant looming layoffs. Many of the people celebrated in photos would soon lose their jobs. Some of their images remained on the walls for months, ghostly reminders of the human costs of radical change.

The cool kids take over

The era of good feelings would be measured in nanoseconds. Indeed, the only thing speedier than Johnson’s planned changes was the velocity with which they unraveled. Inside Penney, the conflict started almost instantly. Johnson “wanted to do this as a mixed marriage,” says former COO Kramer. “He wanted to prove that we could do this with new people as well as the older management. But it was very clear that it was oil and water from day one.”

It was all well and good that Johnson wanted to, as he frequently proclaimed, run Penney like a startup. But it was a venerable company with 159,000 employees and 1,100 stores. It already had a culture, for better or worse.

The newcomers distanced themselves from the holdovers, starting with the fact that a cadre of new top executives refused to move to Dallas and instead jetted in weekly. The Ritz-Carlton, where Johnson and some of the most senior executives stayed, became an unofficial club and meeting spot for the people at the top. Johnson, Francis, and Walker each remained in other cities, and several created powerful satellite operations there; only Kramer moved to Dallas.

Those who were not part of this new team, with a few exceptions, found themselves out of the loop and, increasingly, out of a job. “You felt like you were back in high school with the cool kids and the noncool kids,” says one senior old-guard executive. “I felt slow, dumb, and weak.”

Many of the former Apple-ites looked to implement what they viewed as streamlined Silicon Valley ways. HR chief Walker eliminated performance reviews, which he saw as useless. That happened to make it that much easier to ax people, because all decision-making was up to the boss and there was no need to consult any performance-assessment data. Says Walker: “I abhor make-work HR bureaucracy that doesn’t really improve the capabilities of the people and the company.”

Johnson’s character shaped the tone of Penney’s transformation. As genial as he is — he is the quintessential cheerful Sunday-school teacher and kids’-little-league-coach kind of dad — he has the personality of a zealot. Johnson displays the sort of enthusiasm and unwavering commitment that inspires followers. (And he showed his belief in his own plan by investing $50 million in Penney warrants that would pay off only if the stock rose.) There were only two kinds of people in Johnson’s world — believers and skeptics. “I choose to inspire and create believers,” he told me at the time. “I don’t like negativity. Skepticism takes the oxygen out of innovation.”

Johnson in a renovated strore in 2012.Photograph by Mark Peterson for Fortune

Criticism, valid or otherwise, marked you as a skeptic. Executive vice president Steve Lawrence joined that category when he suggested that Johnson should conduct tests before eliminating price promotions from one day to the next. When a decision was made to reduce the top merchants from two to one at the end of February, it was Lawrence who was cut rather than Liz Sweney, who publicly supported the new plan.

Some 60 top performers from the old regime did have a chance to be part of the revolution via a new program called (naturally) the iTeam. The group brainstormed ways to improve the company and visited famous retailers like Selfridges and Printemps for inspiration. But when the firings began in April, many of the iTeam members were purged, causing a vacuum of talent who understood Penney’s business.

Employees who remained say the new leadership team seemed to have little respect — in some cases, they had outright contempt — for the holdover employees. Michael Fisher, the chief creative officer and another Apple veteran, lectured his team that they needed to learn more about fashion, according to two employees. Each, he said, should wear at least one piece of camouflage clothing every day, as he did. Fisher went so far as to deride the holdovers as DOPES, or dumb old Penney’s employees, according to six staffers. (Fisher declined to comment.) Some veterans retaliated by calling the new team the Bad Apples.

The contempt seemed to extend to customers. As JCP spent more and more on new collaborations with higher-end brands such as Vivienne Tam and Nanette Lepore, the company abandoned previous mainstay labels. Southpole, a clothing brand that appealed primarily to black and Hispanic customers, was dropped. The women’s line for St. John’s Bay, a drab private-label brand — but one that generated $1 billion in annual revenues — was eliminated.

Johnson was totally absorbed in his quest but, say numerous insiders, relatively removed from many specifics of how his team was forcing through the change. It’s hard enough for CEOs to get honest information when they ask for it, since nobody wants to displease the boss. But when you announce that you don’t want to hear skepticism, you’re doubly isolating yourself. In Johnson’s mind, everybody was behind him.

Ellen and the white picket fence

Johnson and his team knew that sales would slide in the short term. Penney had internally projected a 10% to 15% drop in same-store sales for the first quarter after the relaunch. But when the results were tallied in May 2012, they were dismaying: Stores open for at least a year had sold 19% less than in the previous year’s first quarter. Penney customers were bolting, with no sign of replacements, despite millions spent on new marketing that depicted white-picket-fence Americana with great prices and gorgeous products.

Instead of resonating, the ads sparked a firestorm. The company had named Ellen DeGeneres — a popular celebrity and an out and proud lesbian — as its spokesperson. A conservative group, One Million Moms, threatened a boycott. “DeGeneres is not a true representation of the type of families that shop at their store,” the group claimed. “The majority of J.C. Penney shoppers will be offended and choose to no longer shop there.” The company was deluged with enraged letters after a Mother’s Day circular included a photograph of two moms. Johnson, who had supported the marketing as inclusive, began to fret.

When Johnson found out that a Father’s Day ad featuring two dads was also in the works, he decided the messaging had gone from inclusive to political. Too late, Francis told him. The photos had already been printed. Johnson went to the board, which supported going ahead with the ads. He then told Francis he wanted more say over marketing — much of which happened in Minneapolis, where Francis had built a large communications and advertising operation.

Quickly the mood shifted. “Do we need two cooks in the kitchen?” Francis asked. Within days of the meeting he was gone. DeGeneres stopped appearing in most Penney ads. (A source in her camp says the relationship ended amicably.) Says Francis: “I will forever be proud of the remarkable body of work, and I believe it delivered on the mandate.” Johnson himself decided to take on Francis’s duties. So hands-off in many realms, the CEO would become intensely hands-on when it came to marketing. “Ron read every single line of copy,” says Greg Clark, a former senior vice president in the marketing group. “He wrote half of it. He reviewed every single page, every single photograph.”

Internally the changes were hitting hard. The first round of layoffs had begun in April, with 19,000 employees losing their jobs over several months. Soon afterward, Johnson held a Q&A session. The mood was somber. People knew that the company’s results had been worse than expected, and they’d anticipated some cuts. Were more layoffs coming? Johnson remained unruffled. He joked that he had worn his Nikes “in case they chase me out of here.”

By May, less than four months after JCP’s gala launch, a few directors were already getting nervous. Debates over pricing policy began erupting. (On the plus side, the menu options at a board meeting that month — including New Mexican rubbed beef tenderloin with bourbon-ancho sauce and saffron poached sea bass — didn’t seem to rile the directors.) For the moment, they were boxed in. Johnson had warned that the transition would be painful, and the board had greenlighted his plan. There was little it could do at that point besides acquiesce.

Penney’s spending continued to mount. Johnson wanted to make checkout easy for customers by deploying Apple-style roving clerks who could take customer payments on iPads. To do that, Johnson spent millions to equip stores with Wi-Fi and mandated that every item have an RFID tag by early 2013. (As money grew scarce, the plan was shelved.) At Fortune’s Brainstorm Tech conference in July 2012, Johnson was calm and blithely confident, despite growing negative press and a stock price that had halved since the New York show. He reminded everyone that it had taken several years for the Apple retail stores to succeed.

Yet oddly for a former executive of a tech company, Johnson also made a crucial mistake relating to the Internet. He decided to separate JCP.com’s buying groups from the store buying groups — the way Apple did it — severing coordination between what was stocked for the website and what was available for stores. The dotcom decision-making team was based in Silicon Valley, while the store buyers were in Plano. As a result, a customer could no longer find, say, four colors of underpants in the women’s department and be confident that the four colors would also be available online. Ullman had consolidated the teams. All of a sudden the website found itself stripped of support and leadership. Johnson was focused on getting the right look and feel into the physical store. “The first thing is to fix the store,” he said at the time, though he added, “It doesn’t mean online isn’t an equally big opportunity.”

But by the quarter ending in October 2012, dotcom sales had plunged 37% compared with the previous year’s quarter. Just as the rest of the retail world was scrambling to boost mobile and online buying, the Silicon Valley executive was going in the other direction. Penney lost $500 million on that one decision, according to Ullman.

Other Johnson initiatives backfired. In his well-intentioned desire to build trust with customers, the CEO loosened Penney’s exchange policy, allowing customers to return merchandise — without a receipt — and receive cash. Almost instantly, some people began to abuse the policy, grabbing items off Penney’s shelves, bringing them to the register, and then trading them in for cash. At least one popular item was “returned” so frequently that its total sales turned negative for a time.

A second component of Johnson’s strategy — the headline-generating plans to put Martha Stewart stores inside Penney’s — also blew up. In August 2012, Macy’s followed through on its threat and sued Penney. Already Macy’s had managed to temporarily block the new stores. Stock speculators began licking their chops, with short interest that month hitting 40% of the total float.

Quietly, an even more fundamental part of Johnson’s strategy — the moratorium on sales promotions — began to be pared back. Between the rising resistance from the board and the terrible customer response, Johnson had gotten the message. He authorized a return to limited sales and promotions like free haircuts for kids, for example, which weren’t called sales but were certainly promotional. The word “clearance” began trickling back into use.

By Thanksgiving, Johnson — who had always said the transformation would take four years — had started to sound as if he were bargaining for more time. He claimed, on CBS This Morning, that Penney’s benchmark would come in February 2013. “It’s going to take a year to teach people how to respond to the new pricing,” he said. “We will return to growth next year.” He laughed off a question about the increasing pressure. “I’m trying to position JCP for the next 100 years,” he said, “not this year.”

The overthrow

Despite Johnson’s public optimism, the ground was quickly shifting beneath him. Penney’s board had begun splintering into two factions: a pro-Ackman “New York” contingent and a larger cohort led by chairman Tom Engibous, the former CEO of Texas Instruments. Johnson “is still the right man for the job,” Ackman proclaimed publicly. “We don’t walk away.” Still, he was so worried about JCP’s accelerating cash burn that he threatened the board that he would sell all his shares if he was not made the head of the finance committee. Ackman got the appointment — and hired investment bank Blackstone and AlixPartners, a firm best known for advising distressed companies, to explore ways to raise cash.

When 2012 results came out in February, they were atrocious. The company’s revenues had plunged by $4.3 billion, with same-store sales falling 25%. Penney recorded a $1 billion loss. The stock tumbled to $18 — less than half its value a year earlier, even as the overall stock market continued to surge. Cash fell from $1.5 billion to $930 million, and Standard & Poor’s cut the company’s debt rating to CCC+, deep in junk territory, based on concerns about Penney’s liquidity.

Johnson’s job was clearly in jeopardy. He offered to resign. But Engibous assured him of the board’s support.

Amid this turmoil the Martha Stewart case went to trial, and Johnson was forced to take the stand. He looked naive at best, arrogant at worst, as his emails revealed his belief that he could intimidate Macy’s CEO, Terry Lundgren. The best way to stop Macy’s from renewing its agreement with Martha Stewart, Johnson wrote to his team, “is to make our offensive so strong they simply pick up their toys and go home.” After the announcement, he gloated in an email to Ackman: “I’m inclined to let the press run and let [Lundgren] stew for a bit. The more this is seen as brilliant for JCP and Martha, the more he won’t want to interfere.”

The bad news was cresting. And almost simultaneously came the stiletto in Johnson’s back — from the very investor who had paved the way for Johnson’s accession. In March 2013, Penney director Steve Roth, the CEO of Vornado, suddenly sold 43% of his Penney shares at a loss of nearly $100 million. It was a long way from the email he wrote Johnson on Dec. 7, 2011: “Amazing to me how much you’ve gotten done in such a short time, not to mention the quality of the work and genius of the ideas.” Penney CFO Ken Hannah couldn’t make sense of it. “Steve was as supportive and as constructive in [the most recent] board meeting as he had ever been,” he explained at an investors’ conference. “There was not one indication coming out of that meeting that he was going to do anything with his position.”

Why did Roth bail out? The investor declined to be interviewed, but he was facing myriad pressures of his own. The CEO of Vornado had stepped down abruptly, and Roth, already the chairman, had re-assumed the position. Vornado’s shareholders were unhappy with the stock’s performance and questioned why the REIT had invested in retail companies at all. No matter the particulars, the message was clear: Roth had lost faith.

The noose was tightening around Johnson’s neck. Once again he offered to step down, and once again the board told him to stay. (The latter meeting occurred in Ackman’s conference room, which ironically is equipped with a vintage nuclear bomber’s ejector seat.)

In the midst of the turmoil, Johnson embarked on a family vacation in the South of France. When he returned, he got a call from Engibous, according to two executives. The chairman told Johnson that the board would, in fact, be accepting his resignation on Monday, April 8. Less than a year and a half after embracing Johnson’s vision, the board had renounced it. Penney quickly announced that Johnson was “stepping down.”

Most startling was the man chosen to replace him: Mike Ullman, the chief of the J.C. Penney that presumably had been left behind. Previously portrayed as infirm and on the point of retirement, Ullman was now Schwarzenegger on a Segway, back with a vengeance. Johnson never returned to the Plano office. Within weeks, all but one of his disciples were gone too.

The grand experiment was over — just as much of Johnson’s new merchandise was beginning to appear. On May 1, the company ran an apology ad for misleading the customer. “We learned a very simple thing,” an earnest female voice said, “to listen to you.” In June, Johnson’s baby — the renovated home department — finally opened, with quirky Jonathan Adler lamps, mod Conran tables, and Pantone sheets. It was gorgeous, but the items were far beyond the budget of the traditional Penney’s customer. It bombed.

With Penney stuck in limbo by the court case, the company’s Martha Stewart stores were reduced to displaying things that didn’t compete with Macy’s, such as a few party supplies and window treatments. And in what seemed like a cruel joke, a new billboard erected in Culver City, Calif., to announce the Michael Graves home collection featured a teakettle that, viewed from on its side, inexplicably evoked Adolf Hitler, moustache and all, his arm in Nazi salute. The topic “This kettle looks like Hitler” trended quickly on social media site Reddit. There was at least one upside. Unlike Graves’ other wares, the Hitler teakettle immediately sold out.

The unwinding

With Ullman back, it was only a matter of time before Ackman was gone. The investor initially resisted, demanding that the board quickly find a replacement for Ullman. When he was rebuffed, Ackman dispatched two caustic letters to the board, which found their way to the Wall Street Journal. “Sometimes being ‘disruptive’ is exactly what a company and board needs at a critical time,” he wrote. But by now the other directors were aligned. On Aug. 12, 2013, Ackman resigned from the board. He sold his Penney stake at a loss of $470 million.

For his part, Ullman took a giant eraser to just about every plan of Johnson’s. The new home store was jettisoned; by summer I saw 50% to 70% markdowns on newly introduced products. They ended up piled toward the back of stores. Many of the brands that were promised prominent placement found their wares tossed on clearance tables, prices slashed. That in itself caused headaches for Penney. One such brand, Bodum, sued for breach of contract in December. (Penney declined to comment.) Once again, customers’ mailboxes filled with “the noise” of multiple promotions.

Ullman began shoring up Penney’s finances, but not without a stumble: The company stated that it was “comfortable” with its liquidity — and then, only a few weeks later, announced an 84-million-share offering. (The news of the highly dilutive offering walloped Penney’s shares yet again.) The Securities and Exchange Commission briefly investigated Ullman’s U-turn before closing the inquiry with no action.

The company website, reintegrated with the stores, again became a major contributor and helped make up for still-anemic in-store sales. Finally, on Feb. 26, 2014, Penney reported its first glimmer of good news: increases in same-store sales for the first time in two years, up 2% over the prior year’s fourth quarter (which, let’s not forget, was down 32%).

Earnings, however, were even worse than the previous year. The company lost $1.4 billion. Still, Ullman has stabilized the business, slowed the sales skid, and hired a marketing executive who at least seems to be matching the products to customers’ desires. But if Penney has pulled back from the brink of extinction, it remains a long, long way from thriving.

Returning to the pre-Johnson status quo is not a solution. Brick-and-mortar retail remains in deep trouble. During the recent holiday season industrywide in-store traffic slumped by 6.5%, according to RetailNext, even as spending surged online.

Was Johnson’s plan doomed to fail? It’s easy to say virtually nothing would work. For starters, there are far too many stores in America. In early March alone, Radio Shack announced plans to close as many as 1,100 stores, and Staples spls said it would shutter 225, or 12% of its total. And there are no obvious giant candidates to take over the mall spaces, diminishing the value of real estate for companies like Penney.

Of course, much of Penney’s failure was self-inflicted: the bold attempt — blessed by an impulsive board — to wave a magic wand and make a deeply embedded culture disappear, not to mention the rejection of its own customers. Says one executive brought in by Johnson: “It’s akin to people who try to remodel a house when their family is living in it. What we did was try to remodel 80% of the house and, by the way, try to host Thanksgiving and Christmas and a wedding in the backyard.”

Some acolytes fiercely defend Johnson and maintain that his plans would have worked if given enough time. “I think the strategy was right on the money,” says former HR head Walker. “We’ll never know what the results would’ve been if we’d gotten to the point where the stores had been largely transformed. Then it becomes a different store. We don’t get to replay that.”

Indeed, several Johnson initiatives have paid off. The Levi’s stores have had healthy sales (as have similar Disney boutiques). Penney is also holding on to another Johnson favorite, Joe Fresh. And Penney’s wider aisles and polished concrete floors do make the stores look and feel more contemporary.

What Johnson hoped to do was laudable. He wanted to conjure the elusive magic that delights customers at Apple stores, or at a handful of brick-and-mortar retailers such as Burberry, H&M, Target, J. Crew, Lululemon lulu, and a few others devoted to the art and design of the product and the space. Says analyst Brian Sozzi of Belus Capital Advisors: “I will give Johnson this: He did things too quickly, but at least he was trying to set up a company to thrive in terms of where the future of retail was going. He just didn’t go about it the right way.” It’s impossible to know whether Johnson’s reforms could have succeeded, but he does leave one legacy: Nobody will be attempting something similar for a very long time.

Reporter associates: Marty Jones and Susan Kramer

A version of this article appears in the April 7, 2014 issue of Fortune.